Last year the Biden Administration's crypto tax proposals contained some helpful clarifications, including endorsing non-recognition treatment for crypto lending, together with measures aimed at gaining insight into the crypto marketplace, such as expanding FATCA and foreign financial asset reporting into the crypto space, as summarized here. This year the Biden Administration has retained last year's crypto content but added a proposal to extend the wash sale rules to crypto and a climate-focused proposal that applies a 30% excise tax on crypto mining as a measure to reduce associated energy costs. (See the Treasury Department's General Explanations of the Administration's Fiscal Year 2024 Revenue Proposals (the "Greenbook," available here). While the future of the Biden Administration's proposals are unclear in a period of split government, the recent turmoil in the crypto industry, coupled with the perceived need for more clarity on the applicable rules, could create some opportunities for bipartisan consensus in this area. Here is a brief overview of the crypto proposals contained in the Greenbook:
New Proposals for FY 2024:
- Apply the wash sale rules to cryptocurrency. Under this proposal and similar to rules for stocks and securities, retail investors and traders of digital assets would be unable to claim a loss on digital assets that were sold and then repurchased within a 30-day window (a "wash sale"). Instead, the transactions would be consolidated into one transaction, and the holder would recognize loss only upon the subsequent sale of the later acquired cryptocurrencies.
- Impose a 30% excise tax on mining cryptocurrency and other digital assets. This proposal would be used to curb the negative environmental impact of so-called proof-of-work validation of blockchains ("mining") by encouraging cryptocurrencies and other digital assets to shift to an alternative validation mechanism such as proof-of-stake, which uses substantially less energy. Firms engaged in mining would be subject to an excise tax of up to 30% on the cost of the electricity they use in mining. The proposed excise tax would apply irrespective of whether a miner actually receives any reward for its efforts. This is because the excise tax applies to electricity used in mining regardless of whether the miner receives a reward for being the first to successfully validate a relevant blockchain. The tax would phase in over a three-year period (e.g., 10% in 2024, 20% in 2025, and 30% from 2026 onward).
Proposals Carried Over from FY 2023:
- Apply nonrecognition rules applicable to loans of securities to cryptocurrencies. Under this proposal and similar to rules for stocks and securities, lending of actively traded digital assets, including certain cryptocurrencies, would not result in a recognition event upon either the transfer to the borrower or the return to the lender, where (i) the digital assets are returned to the lender at the end of the loan, (ii) the lender takes into account amounts derived from the digital assets, such as additional tokens from airdrops or hard forks, as if it held the digital assets directly throughout the life of the loan, and (iii) the lender retains the risk of loss or opportunity for gain on the digital assets throughout the life of the loan.
- Allow dealers or traders of cryptocurrency and certain digital assets to elect mark-to-market treatment. Current law allows commodity dealers and security or commodity traders to elect to use the mark-to-market method (generally recognizing ordinary gain or loss annually based on the change in value of such securities or commodities). This proposal would permit dealers and traders of actively traded digital assets (as determined by Treasury) and derivatives on or hedges of such assets to elect to use the mark-to-market method. That is, this proposal would recognize actively traded digital assets as a third category of assets eligible for a mark-to-market election, rather than categorize them as securities or commodities.
- Require cryptocurrency brokers to report information on transactions and foreign owners. Under this proposal, certain digital asset brokers, including cryptocurrency exchanges, would be required under FATCA to report information on cryptocurrency transactions such as gross proceeds, as well as the identities of certain substantial foreign owners holding their interests through so-called passive entities, to the United States. Information gathered on these transactions could be exchanged with foreign governments.
- Expand the mandatory disclosure requirement for holders of certain foreign financial assets to include digital assets. Individuals filing a U.S. tax return who hold foreign financial assets valued in the aggregate at more than $50,000 must report on Form 8938 certain information, including information on where the assets are held and account information. This proposal would expand the scope of foreign financial assets to include accounts holding digital assets.
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